Internal Revenue Service
Revenue Ruling

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 Rev. Rul. 75-46

1975-1 C.B. 55

Sec. 111
Sec. 162

IRS Headnote

Premiums paid by bank on life policy held as security. Premiums paid by a bank during its taxable year on an unrelated defaulting borrower's life insurance policy assigned to it as security for his loan are deductible as a business expense and any premium payment recoveries in subsequent taxable years are includible in gross income unless excludable under section 111 of the Code; G.C.M. 14375 superseded.

Full Text

Rev. Rul. 75-46 [fn1]

The purpose of this Revenue Ruling is to update and restate, under the current statute and regulations, the position set forth in G.C.M. 14375, XIV-1 C.B. 52 (1935).

The taxpayer is engaged in the general banking business. A borrower of the taxpayer has assigned to the taxpayer an insurance policy on his life as security for a loan. The borrower is neither an officer, employee, nor a person financially interested in any trade or business carried on by the taxpayer. Following the assignment the borrower experienced financial difficulties, and the taxpayer found it necessary to pay the premiums on the policy in order to protect the loan. The contract of assignment makes no mention of reimbursement to the taxpayer for premiums paid on the policy and, under local law, there is no implied right to recover the premium advances from the debtor personally. At the time the taxpayer paid the premiums, the amount of the unpaid loan exceeded the cash surrender value of the life insurance policy.

The specific question is whether the premiums paid by the taxpayer during the taxable year on the insurance policy on the borrower's life are deductible under section 162 of the Internal Revenue Code of 1954.

Section 162 of the Code provides, in part, for the deduction of all ordinary and necessary expenses paid or incurred during the taxable year in carrying on any trade or business.

Even though there is no express agreement covering a creditor's right of reimbursement for premiums paid on the debtor-insured's life insurance policy and under local law the creditor has no cause of action against the debtor personally, there is an implied right for the creditor to be reimbursed out of the proceeds of the policy. However, under the facts of the instant case, this implied right was worthless since the unpaid debt exceeded the cash surrender value of the policy.

Proper business precaution justified the expenditures for premiums paid by the taxpayer. These payments constituted ordinary and necessary business expenses incident to the protection of the collateral in the usual course of the taxpayer's business. See Dominion National Bank, 26 B.T.A. 421 (1932), acq., XI-2 C.B. 3 (1932).

Accordingly, in the instant case it is held that the premiums paid by the taxpayer during the taxable year on the insurance policy on the borrower's life are deductible under section 162 of the Code.

If in a subsequent taxable year the taxpayer recovers any portion of the premiums it previously deducted, the amount recovered is includible in gross income except to the extent excludable under section 111 of the Code.

G.C.M. 14375 is superseded, since the position set forth therein is restated under current law in this Revenue Ruling.

[fn1] Prepared pursuant to Rev. Proc. 67-6, 1967-1 C.B. 576.